CCH can assist you with stories, including interviews with CCH subject experts. Also, the 2006
CCH Whole Ball of Tax is available in print. Please contact:
 
Leslie Bonacum
(847) 267-7153
mediahelp@cch.com
 
Neil Allen
(847) 267-2179
neil.allen@wolterskluwer.com

Link to special CCH Tax Briefings on key topics from 2005:
 

• Federal Tax Reform Panel Issues Proposals to “Fix America’s Tax System”
  
  
• Katrina Emergency Tax Relief Act of 2005
  
  
• Streamlined Sales Tax Agreement Takes Effect
  
  
• Energy Tax Incentives Act of 2005
  
  
• New Circular 230 Rules of Practice
  
  
• Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
  
  
• Gulf Opportunity Zone Act of 2005
  

Look Beyond the Obvious When Identifying Medical Deductions

FSAs, HRAs, HSAs – Knowing Your Healthcare Acronyms Can Add to Tax Savings

(RIVERWOODS, ILL., January 2006) – As health-care costs continue to increase, consumers may find at least a partial silver lining in tax savings if they better understand the scope of what constitutes medical deductions and what plans are available, both in terms of flexible spending accounts and health insurance, that offer tax-advantaged options, according to CCH, a Wolters Kluwer business and a leading provider of tax and accounting law information, software and services (tax.cchgroup.com).

“When it comes to health care, people often aren’t thinking about the tax ramifications.  They may be ill, and just coping with the illness is all they can handle, or they may simply not understand the link,” said CCH Tax Analyst Mildred Carter, JD. “But ignoring the connection can be costly to those who could most benefit.”

Making the Most of Medical Deductions

Certain dental and medical expenses that are not reimbursed by insurance can be deducted from income, helping to lower the taxes you owe, but only after they exceed 7.5 percent of adjusted gross income (AGI).

For example, a married couple with an AGI of $100,000 and un-reimbursed medical expenses of $3,910 for the year for doctor and hospital visits, as well as prescription and over-the-counter drugs, would not be able to take a medical deduction because their total medical expenses did not exceed $7,500, which is 7.5 percent of their AGI. 

However, if these same taxpayers have the above medical expenses as well as an additional $4,200 in expenses to equip their home with wheelchair ramps, modify doorways and add safety rails to accommodate a disabled child, their total un-reimbursed medical expenses are now $8,110.  This exceeds $7,500 by $610, thus the $610 can be claimed as a medical deduction on their tax return.

What’s Deductible?

A variety of modifications made to your home are deductible as long as they don’t increase the value of your home and are made for the main purpose of supporting medical care for you, your spouse or a dependent.

The entire cost of any modification or improvement that does not increase the value of your home is deductible. These costs may include adding entrance or exit ramps; widening doorways or hallways; installing railings, support bars or other modifications to bathrooms; lowering or modifying kitchen cabinets or equipment; moving or modifying electrical outlets or fixtures; installing lifts other than elevators; modifying stairways; installing handrails or grab bars; modifying hardware; or grading ground or making other modifications outside doorways.  Modifications to your car to accommodate a disability also would be deductible, but the ordinary operating costs would not be.

Certain home modifications that you may make for medical reasons also increase the value of your home and, therefore, would not be fully deductible. The amount deductible would be the cost of the modification that exceeds any increase in the value of your home. This may include elevators or air conditioning systems. Although you may only be able to take a partial deduction, any upkeep as well as electricity costs to operate them would be deductible. 

The home modifications must be medically necessary in order to qualify as a medical expense deduction. Generally, you do not need to show proof unless the IRS requests it. However, it’s a good idea to include proof with your return – for example a statement from your physician – so that you can head off questions even before they occur. 

Beyond the home, some of the other un-reimbursed medical deductions that can add up and should be kept in mind include:

• Alcoholism and drug-addition treatments (including meals and lodging);

• Dental treatments and dentures, bridges and implants;

• Drugs if medically prescribed, and insulin, but not over-the-counter drugs;

• Eye exams, glasses, contact lenses and supplies to clean and maintain them;

• HMO premiums, deductibles, and co-payments;

• Hearing aids, telephone equipment and television modification for the hearing-impaired;

• Medicare Part B premiums deducted from Social Security checks, and Part A premiums for those not eligible for Social Security but voluntarily enrolled in Medicare;

• Hospital services, including room and board for inpatients;

• Medical services of physicians, surgeons, specialists, or other medical practitioners such as osteopaths and podiatrists;

• Stop-smoking programs and prescription drugs but not over-the-counter skin patches or nicotine gum;

• Surgery, even elective, as long as it is legal and not purely for cosmetic reasons;

• Therapy treatments, such as physical, occupational or speech therapy;

• Weight-loss programs (that are medically prescribed); and

• Wheelchairs, crutches, walkers, canes, etc.

“Fortunately, most taxpayers don’t find themselves with that many un-reimbursed medical expenses.  However, those who need to modify their homes or have significant un-reimbursed expenses should really keep track of the costs.  They’ll find it’s well worth saving the bills and receipts so that they can claim a deduction for as much as possible,” said Carter.

Carter added that someone who has an elective surgery pending, but also knows they’re going to need a more serious type of surgery, for example, dental work that is not covered by their insurance, may want to consider having both procedures in the same year if this would allow the taxpayer to reach the eligibility level for medical deductions. 

Comparing Tax-advantaged Health Accounts

A variety of different types of health care accounts offering tax savings are in use today. The most recent are Health Savings Accounts (HSAs), which were first offered in 2004 as a result of the Medicare Act of 2003 and continue to grow in popularity.  According to a survey conducted last year by the Kaiser Family Foundation, 20 percent of employers who offer health insurance now provide a high-deductible health plan option, with one-third of large organizations, employing more than 5,000 workers, offering HSAs.  Changes also have been made to make Health Care Flexible Spending Accounts (FSAs) more useful, including extending allowable expenses to include over-the-counter medications and extending usage period 2.5 months beyond end of plan year.

Below, CCH compares the plan features and tax-saving implications.

About CCH, a Wolters Kluwer business

CCH, a Wolters Kluwer business (tax.cchgroup.com) is a leading provider of tax, audit and accounting information, software and services. It has served tax, accounting and business professionals and their clients since 1913. Among its market-leading products are The ProSystem fx® Office, CCH® Tax Research Network™, Accounting Research Manager™ and the U.S. Master Tax Guide®. CCH is based in Riverwoods, Ill.

Wolters Kluwer is a leading multinational publisher and information services company. Wolters Kluwer has annual revenues (2004) of €3.3 billion, employs approximately 18,400 people worldwide and maintains operations across Europe, North America and Asia Pacific. Wolters Kluwer is headquartered in Amsterdam, the Netherlands (www.wolterskluwer.com). Its depositary receipts of shares are quoted on the Euronext Amsterdam (WKL) and are included in the AEX and Euronext 100 indices.

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